Keep It Fair – Stay Aligned With Fair Lending Practices

Abstract:   Community banks are on the front lines when it comes to ensuring people in their local areas have equal access to loans. This means they must be vigilant in maintaining stringent lending standards to avoid any suggestion of discriminatory practices. This article suggests five steps for avoiding violations of fair lending laws and developing an effective compliance program, including conducting a risk assessment and providing compliance training.

Keep it fair

Stay aligned with fair lending practices

Community banks are on the front lines when it comes to ensuring people in their local areas have equal access to loans. This means they must be vigilant in maintaining stringent lending standards to avoid any suggestion of discriminatory practices. Violations of fair lending laws have the potential to affect a community bank’s bottom line in the form of litigation or other penalties. Plus, they may cause a bank to lose customers.

The laws are clear

There are two primary fair lending laws. First, the Fair Housing Act (FHA) prohibits discrimination in residential real estate-related transactions based on race or color, national origin, religion, sex, handicap, or familial status. For example, banks can’t discriminate against households with one or more children under 18, pregnant women, or people in the process of adopting or otherwise gaining custody of a child.

Second, the Equal Credit Opportunity Act (ECOA) prohibits discrimination in credit transactions based on race or color, national origin, religion, sex, marital status, age (assuming the applicant has the capacity to contract), an applicant’s receipt of income from a public assistance program, or an applicant’s good faith exercise of his or her rights under the Consumer Credit Protection Act.

In addition, the Home Mortgage Disclosure Act requires certain lenders to report information about mortgage loan activity, including the race, ethnicity and sex of applicants. And the Community Reinvestment Act provides incentives for banks to help meet their communities’ credit needs.

These steps will help

Here are five tips for developing an effective compliance program:

1. Conduct a risk assessment. Identify your bank’s most significant fair lending risks based on its size, location, customer demographics, product and service mix, and other factors. This can reveal weaknesses in the bank’s credit policies and procedures and other aspects of its credit operations. It’s particularly important to examine the bank’s management of risks associated with third parties, such as appraisers, aggregators, brokers and loan originators.
2. Develop a written policy. A comprehensive written fair lending policy is key to help minimize your bank’s risks. This document can go a long way toward mitigating the bank’s liability in the event of a violation by demonstrating its commitment to fair lending.
3. Review your data. Analyzing data about your lending and other credit decisions is important for two reasons: First, it’s the only way to determine whether disparities in access to credit exist for members of the various protected classes. These disparities don’t necessarily signal that unlawful discrimination is taking place — but gathering this data is the only way to make this determination.

Second, lending discrimination isn’t limited to disparate treatment of protected classes. Banks are potentially liable under the FHA and ECOA if their lending practices have a disparate impact on protected classes. For example, a policy of not making single-family mortgage loans under a specified dollar amount may disproportionately exclude certain low-income groups, even though the policy applies equally to all loan applicants.

Banks can defend against allegations of discrimination based on disparate impact by showing that the policy was justified by business necessity and that there was no alternative practice for achieving the same business objective without a disparate impact.

4. Provide compliance training. Even the most thorough, well-designed policy won’t be worth the paper it’s printed on unless you provide fair lending compliance training for bank directors, management and other relevant employees. It’s also important to evaluate whether the policy is effective.
5. Monitor compliance. You’ll need to monitor your bank’s compliance with fair lending laws and promptly address any violations or red flags. Among other things, perform regular data analysis; monitor and manage consumer complaints; keep an eye on third-party vendors; and conduct periodic independent audits of your compliance program (by your internal audit team or an outside consultant).

Stay on top of fair lending practices

Lending is a key function of any community bank, so your bank should stay alert to any potential violations of fair lending laws. Although some of these laws have been in place for many years, that doesn’t mean banks should become complacent. If not addressed properly, these issues may come back to haunt your bank’s operations and negatively affect its financial health. Contact us to learn more.

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